Slashing Fair Value Estimate on Lexicon Pharmaceuticals

We’re lowering our

The New England Journal of Medicine

, as well as strong data for AstraZeneca’s competing SGLT2 inhibitor, Forxiga. While sotagliflozin’s safety profile looks manageable, Astra’s data significantly alters our thesis, as we now think that it is much less likely that sotagliflozin’s dual inhibition will lead to differentiation. Given these headwinds, we assume only single-digit market share potential for sotagliflozin, and we’ve slightly lowered our probability of approval to 60% in Type 1 diabetes and 50% in Type 2 diabetes. Overall, we now assume peak probability-adjusted sales in both indications combined reaching $1 billion, down from our prior estimate of $3.5 billion. We continue to see very high uncertainty surrounding the value of Lexicon shares, and we note that additional data for SGLT2 inhibitors Forxiga and Jardiance in Type 1 diabetes (expected later this year) should give investors a clearer picture of the potential differentiation of sotagliflozin. With only one approved drug (Xermelo in carcinoid syndrome launching in 2017) and sotagliflozin by far the biggest value driver in the pipeline, Lexicon has yet to establish an economic moat. While potential differentiation of these products contributes to a positive moat trend, we may revisit our moat trend rating if future SGLT2 data mirrors Astra's recent data.

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